Three Australian mates reckon they've worked out how to make advertising in video games work - and investors have backed them to the tune of just under $2 million.

It started as an idea in a pub three years ago, when Sydneysiders Daniel Ringland, Karl Flores and David Banham wondered whether they could create an advertising network targeting an audience of online gamers.

Tomorrow, Ringland, 30, and Flores, 32, are off to Seattle to set up Pinion's US office while Banham, 26, stays back in Australia to build out the engineering team (currently two people but increasing to four).

Early this year, after ups and downs turning the concept into reality, they partnered with Valve, one of the world's largest game developers. This has helped them secure $1.5 million in funding from Australian investors, on top of the $400,000 they raised a year ago.

Globally, if you play multiplayer PC games such as Counter-Strike, Day of Defeat, Half Life 2, Left 4 Dead or Team Fortress 2 online, then you may encounter ads served up from Australia by Pinion.

For those who run online game servers it is a chance to earn back the costs of running the server, while for advertisers it provides them access to the lucrative engaged 18-35 male demographic, which is increasingly spending time away from mainstream media.

Gamers can buy products from within the game window without being bumped out into a web browser. Advertisers so far have included companies such as KFC, Paramount, Boost Mobile and Budweiser.

"We identified a way to place advertising in video games in a different way to what anyone had tried in the past," said Ringland, Pinion's chief operating officer.

Others have tried and failed to create ad networks for video games.

Massive, acquired by Microsoft for between $US200 million and $US400 million in 2006, allowed game developers to write ad inventory into their code which could be changed dynamically. The ads appeared on objects such as billboards and storefronts.

Microsoft shut Massive down at the end of 2010, with the company struggling to gain traction because it required game developers to modify their code before the game's release. Some publishers worried about putting gamers offside and said the revenue gained was too small.

Pinion currently only works with multiplayer games and it takes advantage of ad slots that have already been created in the games, so there's no extra work for game developers.

Their ads appear in front of players - 3 million a month so far - on landing pages such as the welcome screen when they join a new game server. This slot was traditionally used by the server host to run server information and logos.

With ads built into the game content itself it is difficult to measure the success of an ad - and even what counts as one "view". But Pinion can provide full analytics including the number of people who viewed an ad or engaged further i.e. by watching a video commercial.

They are in partnership talks with other game publishers and will soon launch Pinion Game Servers, a site where anyone can host online games for free, support by ads. Since there is a new revenue model game titles can be supported long after the publisher of the game has lost interest.

Pinion wasn't an overnight success. The team had a few false starts and struggled to get media agencies onboard.

"All founders suffered hardships (debt, loss of assets, etc) to get the company up and running," said Flores, Pinion's chief executive.

"There was a three-month period where each month we told ourselves that it was the last month, that we couldn't afford to pay any more server costs, but when the day came to cancel there would be a small glimmer of hope that would force us to keep going."

Constant pitching to potential clients and partners paid dividends, as did advice from successful entrepreneurs such as Scott Farquhar from Atlassian and Dean McEvoy, founder of daily deals site Spreets.

But even after large investments the Pinion trio had a lot to learn, and were burnt by a bad deal in the US that "held the company back for a year".

Atlassian CFO John Bruce-Smith has recently joined Pinion as its CFO, while Newmarket Capital founder Stuart Giglia has signed on as commercial director.

Early on in the company's life a young man from Melbourne approached Pinion to let them know the servers they were running were rubbish and needed fixing. They met him instead of deleting his email - and he's now the company's head of community relations.

Pinion plans to keep at least its engineering base in Australia for as long as it can.

"Throughout our journey we've been offered money left right and centre from the US, including an accelerator program run by Microsoft," said Ringland.

"Our aim has always been to keep the company Australian, but our trips to the US have shown us that on several levels, it's all happening in the US and succeeding here will be very difficult."